Series: SEC Enforcement Program 2007, Projecting Trends and Key Issues (Part X)

SEC Enforcement Trends – Trading Abuses 

The Enforcement Division has long focused on situations in the markets where traders took advantage of situations, exploited conflicts of interest and took unfair advantage to tilt the playing field.  Last year there were several examples of these type of cases: 

·         SEC v. Joseph J. Spiegel, (D.D.C. Jan. 4, 2007), www.sec.gov/litigation/litreleases/2007/lr19956.htm.  A settled civil injunctive action against a former hedge fund portfolio manager which alleged fraud and registration violations involving short selling in connection with a PIPE.  The defendant consented to the entry of a statutory injunction and order requiring the payment of a $110,000 penalty. 

·         In the Matter of Spinner Asset Management, LLC, Et al., (Adm. Dec. 20, 2006), www.sec.gov/litigation/admin/2006/33-8763.pdf. A settled administrative proceeding brought against a fund for fraud and registration violations relating to selling short in connection with a PIPE.  The respondent consented to a cease and desist order and an order directing the payment of over $435,000 in disgorgement. 

·         SEC v. Friedman, Billings, Ramsey & Co., (D.D.C. Dec. 20, 2006), www.sec.gov/litigation/litreleases/2006/lr1950.htm. A settled civil injunctive action which alleged insider trading relating to the firm’s market maker account and registration violations related to short selling in connection with a PIPE offering.  The investment banking firm consented to the entry of a statutory injunction, an order directing the payment of disgorgement, prejudgment interest and a penalty of over $3.7 million and, in a related administrative proceeding, an order of censure.  

Two other significant trading abuse cases last year involved trading ahead and a variety of trading abuses in the auction rate securities markets: 

·         In the Mater of Sanjay Singh, (Adm. Mar. 21, 2006), www.sec.gov/litigation/admin/33-8673.pdf.  Popularly known as the “squawk box case”  this settled administrative proceeding is based on claims that brokerage employees used information regarding institutional investor trades heard over the firm “squawk box” to trade ahead of firm clients.  The respondent consented to the entry of a cease and desist order, a bar from the business, and an order directing payment of $37,500 as disgorgement. 

·         In the matter of Bear Stearns, Citigroup, Goldman Sachs, Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Morgan Stanley DW, RBC Daibn Rauscher, Banc of America, A.G. Edwards, Morgan Keegan, Piper Jafray, SunTrust and Wachovia, (Adm. May 31, 2006), sec.gov/litigation/admin/2006/33-8684.pdf.  This settled administrative proceeding alleged fraudulent trading practices in auctions for auction rate securities.  Each respondent consented to the entry of a cease and desist order and an order requiring the payment of a penalty of either $1.5 million, $750,000 or $125,000 under the two-tiered settlement structure.  

No doubt the enforcement division will continue to focus on these and other types of trading abuses in the future.  Unfairness in the trading markets is a traditional area of focus.  Many of the cases in the future may focus on PIPE offerings where traders seek to take advantage of the fact that the market price of the stock tends to fall in the subsequent offering or hedge funds and complex trading ahead schemes such as the one which is the focus of the current Wall Street sweep.